West Virginia University Research Corporation

Transcription

1 West Virginia University Research Corporation Financial Statements for the Years Ended June 30, 2010 and 2009, Independent Auditors Reports, Report on Federal Awards in Accordance With OMB Circular A-133 for the Year Ended June 30, 2010, and Additional Information for the Year Ended June 30, 2010

2 TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS (RSI) (UNAUDITED) 2 11 FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2010 AND 2009: Statements of Net Assets 12 Statements of Revenues, Expenses and Changes in Net Assets 13 Statements of Cash Flows Notes to Financial Statements INDEPENDENT AUDITORS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 30 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED JUNE 30, SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR JUNE 30, STATUS OF PRIOR YEAR FINDINGS (NONE) ADDITIONAL INFORMATION: 57 Independent Auditors Report on Additional Information 58 Rural Health Education Partnership (RHEP) Program Annual Report Southern Counties 59 Notes to the Rural Health Education Partnership (RHEP) Program for the Year Ended June 30,

3 INDEPENDENT AUDITORS' REPORT To the West Virginia University Research Corporation Board of Directors: We have audited the accompanying statements of net assets of West Virginia University Research Corporation (the "Corporation") as of June 30, 2010 and 2009 and the related statements of revenues, expenses, and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the management of the Corporation. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the respective financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Corporation at June 30, 2010 and 2009, and the changes in net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The Management s Discussion and Analysis on pages 2 to 11 is not a required part of the basic financial statements, but is supplementary information required by the Governmental Accounting Standards Board. This supplementary information is the responsibility of the Corporation s management. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit such information and we do not express an opinion on it. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule of expenditures of federal awards is presented for the purpose of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments and Non-Profit Organizations, and is not a required part of the basic financial statements. This schedule is the responsibility of the management of the Corporation. Such information has been subjected to the auditing procedures applied in our audit of the basic financial statements, and in our opinion, is fairly stated, in all material respects when considered in relation to the basic financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated October 12, 2010, on our consideration of the Corporation s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. October 12,

4 Management's Discussion and Analysis (Unaudited) Year Ended June 30, 2010 Overview The Management's Discussion and Analysis is required supplementary information and has been prepared in accordance with the requirements of Governmental Accounting Standards Board (GASB). This section of the West Virginia University Research Corporation s (the Corporation ) annual financial report provides an overview of the Corporation s financial performance during the fiscal year ended June 30, 2010 as compared to the previous fiscal year. Comparative analysis is also presented for fiscal year 2009 compared to fiscal year The Corporation s annual report consists of three basic financial statements: the statement of net assets, the statement of revenues, expenses and changes in net assets, and the statement of cash flows. These statements focus on the financial condition, the results of operations, and cash flows of the Corporation as a whole. Each of these statements is discussed below. Financial Highlights The Corporation s total net assets decreased from the previous year-end by $5.3 million. This decrease is mainly attributable to the transfer of assets to West Virginia University (the University ) of $14.1 million, which exceeded the increase in net assets of $8.8 million before such transfer. During fiscal year 2010, the growth in total expenses exceeded the growth in total revenues. Overall, management believes that the Corporation continues to be financially sound. Net Assets The statements of net assets present the assets (current and noncurrent), liabilities (current and noncurrent), and net assets (assets minus liabilities) of the Corporation as of the end of the fiscal years. Assets denote the resources available to continue the operations of the Corporation. Liabilities indicate how much the Corporation owes vendors, employees and the University. Net assets measure the equity or the availability of funds of the Corporation for future periods. Net Assets are displayed in three major categories: Invested in capital assets, net of related debt. This category represents the Corporation s total investment in capital assets net of accumulated depreciation and outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. Restricted net assets. This category includes net assets, the use of which is restricted, either due to externally imposed constraints or because of restrictions imposed by law. They are further divided into two additional components - nonexpendable and expendable. Nonexpendable restricted net assets include endowment and similar type funds for which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity and invested for the purpose of producing present and future income, which may either be expended or added to principal. Expendable restricted net assets include resources for which the University is legally or contractually obligated to spend resources in accordance with restrictions imposed by external third parties. 2

5 Unrestricted Net Assets. This category includes resources that are not subject to externally imposed stipulations. Such resources are derived primarily from facilities and administrative earnings and revenues from royalties and investments. Unrestricted net assets are used for transactions related to the educational and general operations of the Corporation and may be designated for specific purposes by action of the Corporation s Board of Directors. Condensed Statements of Net Assets (in thousands) As of June Assets Current Assets $ 43,345 $ 48,641 $ 41,457 Noncurrent Assets 66,126 62,341 56,473 Total Assets $ 109,471 $ 110,982 $ 97,930 Liabilities Current Liabilities $ 41,755 $ 36,630 $ 33,371 Noncurrent Liabilities 39,203 40,544 24,452 Total Liabilities $ 80,958 $ 77,174 $ 57,823 Net Assets Invested in Capital Assets, net of related debt $ 17,341 $ 11,944 $ 19,094 Restricted 1,497 1, Unrestricted 9,675 20,494 20,314 Total Net Assets $ 28,513 $ 33,808 $ 40,107 Total assets of the Corporation decreased by $1.5 million to a total of $109.5 million as of June 30, This decrease was primarily due to a decrease in cash and cash equivalents, as well as a slight decrease in investments. This decrease was offset by an increase in capital assets, net of depreciation and accounts receivable. Total assets had experienced an increase from fiscal year 2008 to fiscal year 2009 of $13.0 million. Cash and cash equivalents decreased $9.8 million primarily due to decreased cash in the dean s overhead funds for facility and administrative cost recoveries on sponsored awards. The decrease in cash and cash equivalents was also partially attributable to two other factors: a payment made to West Virginia University and West Virginia University Institute of Technology for over recovery of fringe benefit charges, as well as an expected declining balance to a line of credit drawn down from the West Virginia Infrastructure and Jobs Development Council. From fiscal year 2008 to fiscal year 2009, cash and cash equivalents had increased primarily due to the unpaid commitment for facilities, administrative and information technology services provided by the University at year end. Investments decreased by $1.8 million primarily due to a scheduled redemption of the University s Auction Rate Certificates (ARCs) in October From fiscal year 2008 to fiscal year 2009 investments had increased due to the purchase of the University s ARCs by the Corporation pursuant to SEC guidance that permitted municipal issuers to repurchase their own debt. 3

6 Net accounts receivable increased by $4.3 million compared to the prior year. A portion of the increase can be attributed to American Recovery and Reinvestment Act (ARRA) funded awards which totaled $1.23 million. The remainder of the increase is due to increased accounts receivable associated with existing private, state and federal awards. Net accounts receivable had decreased from fiscal year 2008 to fiscal year 2009 by $657,000 due to the decrease in receivables associated with the construction of a Biomedical Research Facility. Capital assets, net increased by $5.6 million primarily due to an increase in construction-in-process activity related to the Health Sciences Center Biomedical Research Facility. Capital assets, net had a slightly lower increase from fiscal year 2008 to fiscal year 2009 due to a similar increase in construction-in-process activity. Total liabilities of the Corporation as of June 30, 2010 increased by $3.8 million to a total of $81.0 million. The increase is mainly due to an increase in other deferred revenue and slight increases in accounts payable to West Virginia University and accrued payroll. These increases were partially offset by a decrease in notes payable and accounts payable. This change is significantly lower than the increase from fiscal year 2008 to fiscal year 2009 of $19.4 million.. Other deferred revenue increased by $3.5 million and is primarily attributable to receipt of several scheduled or advance payment sponsored awards during fiscal year A similar, but lower, increase was noted in this category from fiscal year 2008 to fiscal year Accrued payroll increased $235,000 corresponding to an increase in salaries and wages paid to Research Corporation and State employees. Fiscal year 2008 to fiscal year 2009 showed a comparable increase. Accounts payable to West Virginia University increased by $198,000 over prior year. This increase is attributable to an increase in the deans liability for the facility and administrative cost recoveries on sponsored awards. This increase was partially offset by a decrease in the unpaid commitment for facilities, administrative, and information technology services provided by West Virginia University. Accounts payable to West Virginia University had experienced a higher increase from fiscal year 2008 to fiscal year 2009 relating to facility, administrative and information technology commitments. Other accounts payable decreased by $171,000 due to a decrease in outstanding invoices payable to vendors at fiscal year end. A slightly larger change was noted in this category from fiscal year 2008 to fiscal year The Corporation s current assets of $43.3 million were sufficient to cover current liabilities of $41.8 million indicating that the Corporation has sufficient available resources to meet its current obligations. 4

7 The following is a comparative illustration of net assets. COMPARISON OF NET ASSETS June 30, 2010, 2009 and 2008 I N T H O U S A N D S 25,000 20,000 15,000 10,000 5,000 17,341 11,944 19,094 9,675 20,494 20,314 1,497 1, Invested in Capital Assets Unrestricted Restricted Invested in capital assets, net increased by $5.4 million from the prior year primarily due to an increase in the construction-in-progress related to the NASA Independent Verification and Validation (IV&V) Center and the Biomedical Research Center. This category had experienced a decrease from fiscal year 2008 to fiscal year 2009 mainly due to the transfer of completed construction projects to West Virginia University and an increase in notes payable to State agencies. Unrestricted net assets decreased by $10.8 million primarily due to a decrease in the dean s overhead funds for facility and administrative cost recoveries on sponsored awards. Also contributing to the decrease is a payment made to West Virginia University and West Virginia University Institute of Technology for over recovery of fringe benefit charges. This category had no significant change noted from fiscal year 2008 to fiscal year No significant change was noted in restricted net assets. This category had experienced increase from fiscal year 2008 to fiscal year 2009 of $670,000 due to an increase in net assets restricted for debt service payments related to loans from State agencies. Revenues, Expenses and Changes in Net Assets The statements of revenues, expenses and changes in net assets present the operating revenues, operating expenses, nonoperating revenues and expenses and other revenues, expenses, gains, or losses of the Corporation. The utilization of capital assets is reflected in the financial statements as depreciation, which amortizes the cost of an asset over its expected useful life. 5

8 Condensed Statement of Revenues, Expenses and Changes in Net Assets (in thousands) Years Ended June Operating Revenues $ 120,645 $ 112,567 $ 110,356 Operating Expenses 124, , ,059 Operating Income (Loss) (4,039) 1,035 5,297 Net Nonoperating Revenues (Expenses) 1,155 (2,612) 561 (Loss) Income before Other Revenues, Expenses, Gains, or Losses (2,884) (1,577) 5,858 Capital Grants and Gifts 11,276 15,801 13,280 Capital grants (federal) Transfer of Assets to the University (14,101) (20,514) (16,836) Transfer of Net Assets to Bridgemont CTC - (9) - (Decrease) Increase in Net Assets (5,295) (6,299) 2,302 Net Assets at Beginning of Year 33,808 40,107 37,805 Net Assets at End of Year $ 28,513 $ 33,808 $ 40,107 Revenues: The following charts illustrate the composition of revenues by source for 2010 and Nongovernmental Grants & Contracts 17% Other 11% Federal Grants & Contracts 54% State Grants & Contracts 18% Total revenues for fiscal year 2010 were $134.2 million, an increase of $7.5 million compared to the previous year. The increase in total revenues can be attributed to increased revenues from federal grants and investment income. This increase was offset by a decrease in capital grants and gifts, as well as nongovernmental grants. Total revenues for fiscal year 2008 to fiscal year 2009 had increased due to an increase in revenues from non-governmental grants, capital grants and gifts and sales and services of educational departments. Federal grants and contracts revenue increased by $11.3 million. This increase can partially be attributed to new awards funded by the American Recovery and Reinvestment Act (ARRA). The remaining increase is mainly due to increased revenues from new and existing awards including: the NASA IV&V Operations and Maintenance 6

9 grant, the Forensic Grant Project from the U.S. Department of Justice, Task Order for Non-Government Organization Collaborative from the U.S. Department of Labor, and the National Drinking Water Clearinghouse grant from the USDA. Lastly, a portion of this increase is attributable to an increase in facilities and administrative cost recoveries generated from federal grants and contracts. This category had experienced a decrease from fiscal year 2008 to fiscal year 2009 due to decreased grant revenue. Investment income increased by $3.8 million primarily due to favorable changes in the market value of investments reflecting an upturn in current market conditions. The Corporation has also retained and invested funds, representing commitments to West Virginia University for facility, administrative and information technology support, with the WVU Foundation. Investment income experienced a decrease from fiscal year 2008 to fiscal year 2009 due to lower returns on investments and poor market conditions. Capital grants and gifts revenue decreased $4.5 million in fiscal year 2010 due to reduced revenues from closed and existing awards including: Clinical Teaching Center at CAMC from the Department of Health and Human Service, Forensic Grant Program from the U.S, Department of Justice, Medical Simulation Research and Training Center from the Department of Health and Human Service. This decrease was offset by an increase in revenues from new and existing awards including: Neurosciences Institute as well as the Multiple Sclerosis Center, both from the Department of Health and Human Services. This category experienced an increase from fiscal year 2008 to fiscal year 2009 due to an increase in new awards. Expenses: The following is a graphic comparison of total expenses by category between 2010 and Operating Expenses to the University 12% Other 4% Salaries & Wages 43% Supplies & Other Services 33% Benefits 8% Total expenses for the fiscal year 2010 increased by $13.3 million compared to prior year, to $125.8 million. This increase is primarily due to an increase in net operating expenditures to the University, supplies and other services, salaries and wages, and benefits. An increase was noted from fiscal year 2008 to fiscal year 2009 in the same categories. Net operating expenditures to the University increased by $5.6 million compared to the prior year primarily due to a payment made to West Virginia University and West Virginia University Institute of Technology for over recovery of fringe benefit charges. The remainder of the increase is attributed to a transfer to West Virginia University and West Virginia University Institute of Technology of the facility and administrative cost recoveries on sponsored awards. This category experienced a less, but similar, increase from fiscal year 2008 to fiscal year 2009 primarily due to increased department spending on overhead return accounts, payments in support of the University s DOW site initiative and expense related to the operation of the legislatively fund Brownfield Assistance Center. 7

10 Supplies and other services increased by $3.6 million primarily due to an increase in the allowance for uncollectable grants, notably in the private and other categories. An additional increase is due to an increase in payments made in support of the following grants: EV Education, COMP INBRE , Task Order #3, Forensics grant, HAPI Project, and HFHC. A decrease in payments for NASA IV&V Operations and Maintenance offset the above increase. This category had experienced a similar, but lower, increase from fiscal year 2008 to fiscal year 2009 in correlation with payments made in support of the Blanchette Rockefeller Neuroscience Institute and for the operations and maintenance of NASA IV&V. Salaries and wages increased by $3.1 million from the prior year primarily due to the implementation of a merit raise for Corporation employees during fiscal year A lower increase was noted in salaries and wages from fiscal year 2008 to fiscal year Benefits expense increased by approximately $618,000 from prior year corresponding to an increase in salaries and wages. This category had also experienced an increase from fiscal year 2008 to fiscal year 2009 due to increased salaries and wages. Cash Flows The statements of cash flows provide information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing (capital and noncapital) activities of the Corporation during the year. This statement helps users assess the Corporation s ability to generate net cash flows, its ability to meet obligations as they come due, and any potential need for external financing. The statement of cash flows is divided into five sections: Cash flows from operating activities. This section shows the net cash provided by the operating activities of the Corporation. Cash flows from noncapital financing activities. This section reflects the cash received and paid for nonoperating, noninvesting, and noncapital financing purposes. Cash flows from capital financing activities. This section includes cash used for the acquisition and construction of capital and related items. Cash flows from investing activities. This section shows the purchases, proceeds, and interest received from investing activities. Reconciliation of operating income to net cash provided by operating activities. This section provides a schedule that reconciles the accrual-based operating income (loss) and net cash provided by operating activities. 8

11 Condensed Statements of Cash Flows (in thousands) Years Ended June Cash Provided (Used) By: Operating Activities $ (4,359) $ 10,064 $ 13,088 Noncapital Financing Activities Capital Financing Activities (9,474) 1,797 (6,005) Investing Activities 3,720 (4,073) (16,361) (Decrease) Increase in Cash and Cash Equivalents (9,792) 7,942 (9,136) Cash and Cash Equivalents, Beginning of Year 22,977 15,035 24,171 Cash and Cash Equivalents, End of Year $ 13,185 $ 22,977 $ 15,035 Total cash and cash equivalents decreased by $9.8 million during fiscal year 2010 to $13.2 million. Net cash provided by operating activities decreased by $14.4 million primarily due to an increase in payments of operating expenses to the University, payments to suppliers, and payments to employees for salaries, wages, and benefits. This decrease was partially offset by an increase in cash inflows from grants and contracts. A decrease was noted in cash flows provided by operating activities from fiscal year 2008 to fiscal year No significant change was noted in net cash provided by noncapital financing activities in the current fiscal year as well as from fiscal year 2008 to fiscal year Net cash from capital financing activities changed by $11.3 million primarily due to a decrease in inflows from capital gifts and grants and proceeds from loans. This was offset by a decrease in outflows for purchases of capital assets. An increase was noted in this category from fiscal year 2008 to fiscal year Net cash provided by investing activities increased by $7.8 million primarily due to an increase in cash inflows from redemption of matured auction rate certificates (ARCs) and decreased outflows for purchases of investments. This category showed a significant decrease from fiscal year 2008 to fiscal year 2009 due to the purchase of ARCs. Capital Asset and Long Term Debt Activity During fiscal year 2006, the Board of Directors of the Corporation had approved a borrowing plan by the Corporation of up to $24.4 million to finance certain improvements at the HSC including financing the construction of the Biomedical Research Building, and the HSC Learning Center and Library Addition. The Corporation has entered into construction loan and pledge agreements with the West Virginia Housing Development Fund, the West Virginia Economic Development Authority, and the West Virginia Infrastructure and Jobs Development Council to finance such projects. All amounts from the respective State agencies had been drawn down and are recorded as notes payable in fiscal year Other capital activity during fiscal year 2010 included continued construction of the Biomedical Research Facility and NASA IV&V facility. The Corporation transferred assets to the University in the amount of $14.1 million. The transfer of assets to the University included the transfer of construction-in-progress related to the Biomedical Research facility and NASA IV&V in the amount of $6.2 million and equipment in the amount of $7.9 million. The amount transferred in fiscal year

12 was $20.5 million ($13.5 million of construction-in-progress and $7.0 million of equipment). There have been no significant changes in credit ratings or debt limitations that may affect future financing for the Corporation. During fiscal year 2010, the Corporation obtained additional excess liability insurance coverage in the amount of $10.0 million from United Educators Insurance Company. The Corporation made the determination that it does not have the benefit of sovereign immunity should they experience a liability claim that would exceed the coverage by the current WV Board of Risk & Insurance Management (BRIM) policy. In addition, the Corporation has encountered (in contracts with other entities) liability insurance limit requirements in excess of those provided by the BRIM policy. Economic Outlook Research is an integral part of the University s mission. The Corporation supports this mission by fostering the growth of the research agenda at the University through improving the research support infrastructure, facilitating interdisciplinary collaborations and mutually beneficial partnerships with government agencies and the private sector, and promoting economic development through technology transfer. Specifically, the Corporation serves as the University s fiscal agent for the application and administration of funds awarded by external agencies for the pursuit of the research mission and other scholarly activities. The Corporation further strives to increase faculty competitiveness for external funding by sponsoring professional development activities such as grant-development seminars and workshops, mentorship programs and external peer reviews to critique proposals prior to submission. Fiscal Year 2010 was a significant year for the University s research efforts. Total sponsored funding (awards) for FY 2010 topped out at $177.0 million 18%, or $26.0 million, higher than the previous year and an all-time high level for WVU. The University is poised to build on that success through its aggressive pursuit of National Science Foundation, which is planned to generate three major awards in FY The Corporation will be an integral part of facilitating this activity. The Corporation also is playing an active role in the University s Advanced Energy Initiative (AEI). This initiative focuses resources on addressing and solving critical energy issues during the next 5 to 10 years with an emphasis on building partnerships with other universities, government agencies, and private stakeholders. The immediate goal is to grow AEI research awards to $40.0 million per year by fiscal year The goal is a challenging but reasonable goal for WVU, and it is an outgrowth of progress that WVU is already making in increasing its external research support. Moreover, the goal recognizes the capacity of the AEI to enable faculty members to become even more competitive in bidding for large interdisciplinary, multi-institution, multi-investigator awards. The Research Trust Fund (the Fund ) that was established by the West Virginia State Legislature in fiscal year 2008 has committed $35.0 million in State funds to the University to support four priority interdisciplinary research areas consistent with the University s strategic research plan. These State funds need to be directly matched to qualified private donations and pledges received by the University, to create $70.0 million in research endowments. The success of this program will undoubtedly impact the Corporation as it will stimulate sponsored awards in other areas of the University and the Corporation will need to respond by providing increased support services. The program s success is already being felt. During the period from March 8, 2008 to June 30, 2010, the WVU Foundation received 221 qualified private gifts (donations and pledges) totaling $7.8 million for Research Trust Fund and matching funds have been received from the State for that same amount. A wide range of research projects at the University have been selected for funding under the American Recovery and Reinvestment Act (ARRA). To date, approximately 67 individual awards totaling nearly $40.0 million have been received from ARRA. 10

13 The Corporation continues to expand its business incubator program to nurture start-up companies. The business incubator is housed in the Chestnut Ridge Research Building located off Route 705 in Morgantown. The Corporation provides business services such as business plan development, marketing, advertising, finance, and information technology assistance to the start-up companies. Initial operating expenses were funded by a Benedum Foundation grant. The WVU Incubator is operating at full capacity and three businesses graduated in fiscal year The Corporation is also involved in technology transfer activities such as invention disclosures, copyrights, trademarks, patents filed and issued, license agreements and new start-up companies being formed. More than $147,000 in license and royalties were generated in fiscal year The expansion of business incubator and technology transfer activities is expected to continue, creating new jobs and establishing a research base for economic development in the State of West Virginia. The challenges faced by the University in light of insufficient State appropriations and challenging economic conditions require the University to focus on its strengths. One of the University s strengths is its record of research and sponsored program funding. Through the Corporation s efforts, the University will strive to further improve its competitive research position and continue the growth enterprise. 11

14 STATEMENTS OF NET ASSETS AS OF JUNE 30, 2010 AND 2009 (Dollars in Thousands) ASSETS Current Assets: Cash and cash equivalents $ 13,185 $ 22,977 Accounts receivable, net of allowances for doubtful accounts of $1,235 and $543 29,340 25,026 Due from the Commission Prepaid expenses Total current assets 43,345 48,641 Noncurrent Assets: Investments 22,834 24,601 Capital assets, net 43,292 37,740 Total noncurrent assets 66,126 62,341 TOTAL ASSETS $ 109,471 $ 110,982 LIABILITIES Current Liabilities: Accounts payable $ 4,332 $ 4,503 Accounts payable - West Virginia University, current portion 9,106 8,176 Accrued liabilities 58 - Accrued payroll 2,770 2,535 Deferred revenue 24,240 20,701 Compensated absences Notes payable, current portion 1, Total current liabilities 41,755 36,630 Noncurrent Liabilities: Notes payable 24,527 25,203 Accounts payable - West Virginia University 14,564 15,296 Other noncurrent liabilities Total noncurrent liabilities 39,203 40,544 TOTAL LIABILITIES $ 80,958 $ 77,174 NET ASSETS Invested in capital assets, net of related debt $ 17,341 $ 11,944 Restricted for debt service (expendable) 1,497 1,370 Unrestricted 9,675 20,494 TOTAL NET ASSETS $ 28,513 $ 33,808 See notes to financial statements. 12

15 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS YEARS ENDED JUNE 30, 2010 AND 2009 (Dollars in Thousands) OPERATING REVENUES Federal grants and contracts $ 72,173 $ 60,845 State grants and contracts 24,314 26,872 Local grants and contracts Nongovernmental grants and contracts 23,176 23,917 Sales and services of educational departments Other operating revenues Total operating revenues 120, ,567 OPERATING EXPENSES Salaries and wages to the University 53,858 50,721 Benefits to the University 10,275 9,657 Scholarships and fellowships 1,613 1,667 Utilities 1, Supplies and other services 41,988 38,381 Depreciation Net operating expenses to the University 15,246 9,686 Other operating expenses Total operating expenses 124, ,532 OPERATING (LOSS) INCOME (4,039) 1,035 NONOPERATING REVENUES (EXPENSES) Gifts Investment income (loss) (including unrealized gain (loss) of $1,408 and ($1,667)) 1,952 (1,824) Interest on capital asset-related debt (1,118) (943) Other nonoperating revenues (expenses) - net 2 (1) Net nonoperating revenues (expenses) 1,155 (2,612) LOSS BEFORE OTHER REVENUES, EXPENSES, GAINS, OR LOSSES (2,884) (1,577) Capital grants and gifts 11,276 15,801 Capital grants (federal) INCREASE IN NET ASSETS BEFORE TRANSFERS 8,806 14,224 TRANSFER OF ASSETS TO THE UNIVERSITY (14,101) (20,514) TRANSFER OF NET ASSETS TO BRIDGEMONT CTC - (9) DECREASE IN NET ASSETS (5,295) (6,299) NET ASSETS--BEGINNING OF YEAR 33,808 40,107 NET ASSETS--END OF YEAR $ 28,513 $ 33,808 See notes to financial statements. 13

16 STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2010 AND 2009 (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Grants and contracts $ 119,239 $ 113,790 Payments to suppliers (42,186) (37,566) Payments to employees of the University and Corporation (53,622) (50,504) Payments for benefits to the University and Corporation (10,699) (9,781) Payments for utilities (1,116) (851) Payments for scholarships and fellowships (1,647) (1,680) Payments of operating expenses to the University (15,049) (2,427) Other receipts (payments) 721 (917) Net cash (used in) provided by operating activities (4,359) 10,064 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Gifts Other nonoperating receipts (payments) 2 (1) Net cash provided by noncapital financing activities CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES Capital gifts and grants received 11,276 17,285 Capital grants - federal received Purchases of capital assets (19,865) (24,645) Principal paid on capital debt (610) (101) Interest paid on capital debt (689) (156) Proceeds from loans - 9,414 Net cash (used in) provided by capital financing activities (9,474) 1,797 CASH FLOWS FROM INVESTING ACTIVITIES Investment income (loss) 544 (157) Redemption of matured investments 3,806 - Purchases of investments (630) (3,916) Net cash provided by (used in) investing activities 3,720 (4,073) (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,792) 7,942 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 22,977 15,035 CASH AND CASH EQUIVALENTS - END OF YEAR $ 13,185 $ 22,977 (continued) 14

17 STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED JUNE 30, 2010 AND 2009 (Dollars in Thousands) Reconciliation of operating (loss) income to net cash (used in) provided by operating activities: Operating (loss) income $ (4,039) $ 1,035 Adjustments to reconcile operating (loss) income to net cash (used in) provided by operating activities: Depreciation expense Changes in assets and liabilities: Accounts receivable, net (4,314) 656 Due from the Commission 5 (23) Prepaid expenses (187) 124 Accounts payable (312) 7,804 Accrued liabilities 362 (1,235) Deferred revenue 3,539 1,174 Compensated absences Net cash (used in) provided by operating activities $ (4,359) $ 10,064 Noncash Transactions: Construction in progress additions in accounts payable $ 337 $ - Unrealized gain (loss) on investments $ 1,408 $ (1,667) Capitalization of interest $ 9 $ - Accrued interest on notes payable $ 438 $ 1,493 Assets transferred to the University $ 14,101 $ 20,514 Assets transferred to Bridgemont CTC $ - $ 9 See notes to financial statements. 15

18 NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2010 AND ORGANIZATION West Virginia University Research Corporation (the "Corporation") is a not-for-profit corporation incorporated in 1986, pursuant to the laws of the State of West Virginia (the "State"). The purpose of the Corporation is to foster and support research at West Virginia University (the "University") and to provide commercial outlets for the research activities of the University faculty, staff and students. With the assistance of the University, the Corporation has been designated by the University to fulfill the role of public institutions to work in partnership with business, industry or government and encourages the acceptance of gifts, grants, contracts and equipment, and the sharing of facilities, equipment and skilled personnel to promote and develop joint, applied research and development, technical assistance and instructional programs in the State. The Corporation receives grants on behalf of the University, some of which are for the construction or acquisition of capital assets. These expenditures are recorded on the Corporation s records and the completed asset is transferred to the University as the beneficiary of the asset. The Corporation exists as an organization separate from the University. West Virginia state code allows the Corporation to employ personnel separate from the University. The Corporation chose to exercise this option effective January 1, The Corporation maintains a payroll and human resources information system separate from the University. The Corporation first began fulfilling its purpose in SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of the Corporation have been prepared in accordance with generally accepted accounting principles as prescribed by the Governmental Accounting Standards Board (GASB). The financial statement presentation required by GASB provides a comprehensive, entity-wide perspective of the Corporation s assets, liabilities, net assets, revenues, expenses, changes in net assets and cash flows. The Corporation follows all GASB pronouncements as well as Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989 and amendments thereof, and has elected not to apply the FASB Statements and Interpretations issued after November 30, 1989 to its financial statements. a. Reporting Entity The Corporation is a component unit of the University, as the University is the sole member of the non-stock not-for-profit corporation and is combined in the University s financial statements. The University is an operating unit of the West Virginia Higher Education Fund and represents separate funds of the State that are not included in the State s general fund. The University is a separate entity, which, along with all State institutions of higher education, the West Virginia Higher Education Policy Commission (the Commission ) (which includes West Virginia Network for Educational Telecomputing (WVNET)), and the West Virginia Council for Community and Technical College Education form the Higher Education Fund of the State. The Higher Education Fund is considered a component unit of the State, and 16

19 its financial statements are discretely presented in the State s comprehensive annual financial report. b. Basis of Accounting For financial reporting purposes, the Corporation is considered a special-purpose government engaged only in business-type activities. Accordingly, the financial statements of the Corporation have been prepared on the accrual basis of accounting with a flow of economic resources measurement focus. Revenues are reported when earned and expenses are reported when materials or services are received. c. Cash and Cash Equivalents For purposes of the statement of net assets, the Corporation considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents include cash in bank accounts which is invested in daily repurchase agreements or the Certificate of Deposit Account Registry Service (CDARS) program. These investments are highly liquid. Cash and cash equivalents also include Money Market investments. d. Investments Investments, other than alternative investments, are presented at fair value, based upon quoted market values. The alternative investments are carried at estimated fair value. These valuations include assumptions and methods that were reviewed by the Corporation s management and are primarily based on quoted market values or other readily determinable market values for underlying investments. The Corporation believes that the carrying amount of its alternative investments is a reasonable estimate of fair value. The majority of the alternative investments have a readily determinable market value. Because certain assets underlying the alternative investments are not readily marketable, and the estimated value is subject to uncertainty, the reported value may differ from the value that would have been used had a ready market existed. e. Allowance for Doubtful Accounts It is the Corporation s policy to provide for future losses on uncollectible contracts and grants receivable based on an evaluation of the underlying contract and grant balances, the historical collectibility experienced by the Corporation on such balances and such other factors which, in the Corporation s judgment, require consideration in estimating doubtful accounts. f. Noncurrent Cash, Cash Equivalents and Investments Investments held for more than one year and not used for current operations are classified as a noncurrent asset. g. Capital Assets Capital assets are stated at cost at the date of acquisition or construction, or fair market value at the date of donation in the case of gifts. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 50 years for buildings. The Corporation s capitalization threshold for equipment is $5,000. The accompanying financial statements reflect all adjustments required by GASB. h. Deferred Revenue Revenues for programs or activities to be conducted primarily in the next fiscal year are classified as deferred revenue, including advance payments on sponsored awards. 17

20 i. Compensated Absences The Corporation accounts for compensated absences in accordance with the provisions of GASB. This statement requires entities to accrue for employees rights to receive compensation for vacation leave or payments in lieu of accrued vacation or sick leave as such benefits are earned and payment becomes probable. The Corporation s full-time employees earn up to 2 days paid time off for each month of service and are entitled to compensation for accumulated, unpaid leave upon termination. The estimated expense and expense incurred for paid time off is recorded as a component of benefits expense on the statement of revenues, expenses, and changes in net assets. j. Noncurrent Liabilities Noncurrent liabilities include liabilities that will not be paid within the next fiscal year, including certain amounts due to the University for research cost recovery. k. Net Assets GASB establishes standards for external financial reporting for public colleges and universities and requires that financial statements be presented on a basis to focus on the Corporation as a whole. Net assets are classified into four categories according to external donor restrictions or availability of assets for satisfaction of Corporation obligations. The Corporation s net assets are classified as follows: Invested in capital assets, net of related debt: This represents the Corporation s total investment in capital assets, net of accumulated depreciation and outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. Restricted net assets expendable: This includes resources which the Corporation is legally or contractually obligated to spend in accordance with restrictions imposed by external third parties. Restricted net assets nonexpendable: This includes endowment and similar type funds which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expended or added to principal. The Corporation did not have any restricted nonexpendable net assets as of June 30, 2010 and Unrestricted net assets: Unrestricted net assets include resources that are not subject to externally imposed stipulations. Such resources are derived from investment income and sales and services of educational activities. Unrestricted net assets are used for transactions related to the educational and general operations of the Corporation and may be designated for specific purposes by action of the Board of Directors. 18

21 l. Classification of Revenues: The Corporation has classified its revenues according to the following criteria: Operating Revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as (1) most federal, state, local and nongovernmental grants and contracts, and (2) sales and services of educational activities. Nonoperating Revenues: Nonoperating revenues include activities that have the characteristics of non-exchange transactions, such as gifts and contributions, and other revenues that are defined as nonoperating revenues by GASB, such as investment income. Other Revenues: Other revenues primarily consist of capital grants and gifts. m. Use of Restricted Net Assets The Corporation has adopted a formal policy regarding whether to first apply restricted or unrestricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available. The Corporation attempts to utilize restricted net assets first when practicable. The Corporation did not have any designated net assets as of June 30, 2010 or n. Government Grants and Contracts Government grants and contracts normally provide for the recovery of direct and indirect costs, subject to audit. The Corporation recognizes revenue associated with direct costs as the related costs are incurred. Recovery of related indirect costs is generally recorded at fixed rates negotiated for a period of one to three years. o. Income Taxes The Corporation has received from the Internal Revenue Service an exemption from taxation under Section 501 (c) (3) of the Internal Revenue Code as an entity organized for educational, research and economic development purposes. p. Cash Flows Any cash and cash equivalents escrowed, restricted for noncurrent assets, or in funded reserves are included as cash and cash equivalents for the purpose of the statement of cash flows. q. Risk Management The State s Board of Risk and Insurance Management (BRIM) provides general liability, property and auto insurance coverage to the Corporation. Such coverage is provided to the Corporation through a self-insurance program maintained by BRIM for general liability and auto insurance coverage. BRIM maintains a self-insurance program to pay the first $1,000,000 of each property insurance claim and purchases excess property insurance from commercial insurance market to cover individual claims that exceed $1,000,000. BRIM self-insurance programs may involve experience and exposure related premiums. BRIM engages an independent actuary to assist in the determination of its premiums so as to minimize the likelihood of future premium adjustments to the Corporation or other participants in BRIM s insurance programs. As a result, management does not expect significant differences between the premiums the Corporation is currently charged by BRIM and the ultimate cost of that insurance based on the Corporation s actual loss experience. In the event such differences arise between estimated premiums currently charged by BRIM to the Corporation and the Corporation s ultimate actual loss experience, the difference will be recorded, as the change in estimate becomes known. 19